It just seems too complicated. I want a set-it-and-forget-it portfolio, and am strongly considering investing 100% in VT. Put it all in VT, and leave it alone for a long time. But if I wanted to TLH, I'd be better off slicing and dicing to take advantage of market volatility, monitoring the portfolio frequently, selling when losses occur, tracking fund distribution dates to ensure qualified dividend treatment, etc.

Just seems like too much. How much am I giving up in "tax alpha" by doing this? Wealthfront says 1%. Do you agree?

Notice the section on "Investing in a single sum". All of the advantage (assuming you are going to eventually sell, not donate to charity or pass to heirs, for which there are added advantages), comes from the $3000 you get to deduct from your income tax, which you can then invest.

It's up to you whether it's worth the hassle to get $3,000 per year off your income taxes.

Clivus1 wrote:The only time tax loss harvesting works in your favor is if you never sell your harvested position. For most people TLH makes no sense in the long term. Below is a link to an explanation:

I've never understood this: it's not the capital loss per se that I want, it's the ability of the capital loss to offset total income, up to $3k per year. That's trading a 15% tax rate for, say, a 25% tax rate. Or an 18.8% tax rate for a 35% tax rate. Isn't that a true gain?

Clivus1 wrote:The only time tax loss harvesting works in your favor is if you never sell your harvested position. For most people TLH makes no sense in the long term. Below is a link to an explanation:

The article seems to be arguing that TLH makes sense because you end up paying the same tax down the road, all else equal. I thought that was understood, though, and that the benefit of TLH was letting that money grow in the meantime. Am I oversimplifying? edit: just saw letsgobobby's post and that is another good point. I don't see how it makes "no sense in the long run".

It does seem like a hassle and I wouldn't bother unless I had a huge capital loss. I certainly wouldn't slice my portfolio just to make it more amenable to TLH.

However, all the advantage (assuming you will eventually sell) comes from the free $3000 * (tax rate) per year you get from the IRS for realizing the losses, which you can invest.

So there's no "trading" tax rates. It's simply a refund on your current marginal rate each year ($500k / $3k per year = a lifetime of $3k deductions).

I'm pretty sure we're saying the same thing. On that $3000 loss which I will eventually pay capital gains taxes on later, I am paying (for example) 15% in the future but getting a 25% tax rebate now. That is 10% positive. On $3000 every year for someone in the 33% tax bracket vs 18.8% capital gains tax rate, that's a 14.2% gain on $3000 or almost $450 year after year in reduced taxes paid. That seems like a good reason to TLH.

Also the higher your income, the more likely you are not to eventually sell all taxable holdings. Whether to charity or stepped up basis to heirs, the TLH benefits.

I'm guessing very few Bogleheads will be flat broke before they die. Many will have no problem holding the positions with the biggest tax burden until they can pass them onto their heirs with a stepped up cost basis.

letsgobobby wrote:I'm pretty sure we're saying the same thing. On that $3000 loss which I will eventually pay capital gains taxes on later, I am paying (for example) 15% in the future but getting a 25% tax rebate now. That is 10% positive. On $3000 every year for someone in the 33% tax bracket vs 18.8% capital gains tax rate, that's a 14.2% gain on $3000 or almost $450 year after year in reduced taxes paid. That seems like a good reason to TLH.

Ah perhaps we are saying the same thing.

But I am a bit unsure about what you mean. If you have a 25% tax bracket now, and take the $3,000 loss as a deduction, you get $750 back on your taxes as free money. If you invest that $750, any gains on that $750 are taxed at capital gains rates. So if it goes up to $850, you only pay capital gains on $100.

But if you didn't TLH, you would never even see that $750, and not pay any gains or anything.

The 25% * $3,000 is simply extra, free money, is it not? If you take the loss one year on your income taxes, your original $500k capital loss doesn't drop to a $497k capital loss for offsetting future gains, does it? Are we saying the same thing?

letsgobobby wrote:I'm pretty sure we're saying the same thing. On that $3000 loss which I will eventually pay capital gains taxes on later, I am paying (for example) 15% in the future but getting a 25% tax rebate now. That is 10% positive. On $3000 every year for someone in the 33% tax bracket vs 18.8% capital gains tax rate, that's a 14.2% gain on $3000 or almost $450 year after year in reduced taxes paid. That seems like a good reason to TLH.

Ah perhaps we are saying the same thing.

But I am a bit unsure about what you mean. If you have a 25% tax bracket now, and take the $3,000 loss as a deduction, you get $750 back on your taxes as free money. If you invest that $750, any gains on that $750 are taxed at capital gains rates. So if it goes up to $850, you only pay capital gains on $100.

But if you didn't TLH, you would never even see that $750, and not pay any gains or anything.

The 25% * $3,000 is simply extra, free money, is it not? If you take the loss one year on your income taxes, your original $500k capital loss doesn't drop to a $497k capital loss for offsetting future gains, does it? Are we saying the same thing?

I think we're speaking related languagese, like Cantonese and Mandarin, that are somehow very similar yet mutually unintelligible!

boggler wrote:It just seems too complicated. I want a set-it-and-forget-it portfolio, and am strongly considering investing 100% in VT. Put it all in VT, and leave it alone for a long time. But if I wanted to TLH, I'd be better off slicing and dicing to take advantage of market volatility, monitoring the portfolio frequently, selling when losses occur, tracking fund distribution dates to ensure qualified dividend treatment, etc.

Just seems like too much. How much am I giving up in "tax alpha" by doing this? Wealthfront says 1%. Do you agree?

As Warren Buffett so often notes his favorite holding period is "forever".

I think you are fine.

Perhaps if you post your portfolio you will receive more comprehensive feedback and analysis.

I believe with TLH, you can offset 3000 current income every year on your taxes. But this is not the huge benefit as I see it. If one does TLH throughout the accumulation years he will accumulate losses to offset gains when he sells during the decumulation retirement years. I think this is a potential huge benefit and can add 0.5-0.7% annualized over buy and hold. Eager to hear if I have this concept correct.

I am always amused by peoples fascination with Tax Loss Harvesting, it is like The Red Badge of Courage, they're proud of it. In reality it is trying to get some benefit from an investing mistake. The market has been going up for the past 4 years, if I did any TLH in the past 4 years I wouldn't admit it, especially on this board....Gordon

Random Walker wrote:I believe with TLH, you can offset 3000 current income every year on your taxes. But this is not the huge benefit as I see it. If one does TLH throughout the accumulation years he will accumulate losses to offset gains when he sells during the decumulation retirement years. I think this is a potential huge benefit and can add 0.5-0.7% annualized over buy and hold. Eager to hear if I have this concept correct.

Dave

I don't believe that's the case - look at the numbers I posted above as an example of how you pay the same taxes at the end of the day and given that example let me know if you disagree.

livesoft wrote:I am a big fan of TLHing, but I have to say that one should not have to TLH very often ... say once every 3 years or so. Since one would only need to do it rarely, I see no reason not to do it.

As I started my taxable portfolio in the summer of 2007, I had a couple of great opportunities to TLH. As such, I have a lot of carry-over losses banked now, so I'm not that aggressive on new ones. Plus things have generally gone up since the last round, and there haven't been too many tempting ones.

gwrvmd wrote:I am always amused by peoples fascination with Tax Loss Harvesting, it is like The Red Badge of Courage, they're proud of it. In reality it is trying to get some benefit from an investing mistake. The market has been going up for the past 4 years, if I did any TLH in the past 4 years I wouldn't admit it, especially on this board....Gordon

Nonsense. While the general trend has been up, there have been some wiggles along the way. Internationals in particular were hammered in 2010. That doesn't mean that those represent errors.

I don't bother. Several reasons. One, it's a pain. Second, the 3K loss isn't a big deal. Most important, I am very happy with my TSM fund. I do not want to replace it with a comparable fund (I guess Index500) which you must be prepared to hold forever.

gwrvmd wrote:I am always amused by peoples fascination with Tax Loss Harvesting, it is like The Red Badge of Courage, they're proud of it. In reality it is trying to get some benefit from an investing mistake. The market has been going up for the past 4 years, if I did any TLH in the past 4 years I wouldn't admit it, especially on this board....Gordon

Nonsense. While the general trend has been up, there have been some wiggles along the way. Internationals in particular were hammered in 2010. That doesn't mean that those represent errors.

Brian

I would not consider this "nonsense" but rather reasonable.

Our mentor Jack Bogle does not rebalance as noted in many of his excellent interviews.

So many people consider TLH to be like an interest free loan from the government. It is true that if you TLH your cost basis becomes lower. But when you enter decumulation phase, the gains in the first shares one sells will be offset by accumulated losses. So the investor will pay no taxes. He doesn't start paying taxes on gains until he runs out of accumulated losses to offset them. So the tax is effectively delayed until later in decumulation phase. Thus the reference to "interest free loan from the government". If I have any of this wrong, please correct me. Thanks.

Random Walker wrote:So many people consider TLH to be like an interest free loan from the government. It is true that if you TLH your cost basis becomes lower. But when you enter decumulation phase, the gains in the first shares one sells will be offset by accumulated losses. So the investor will pay no taxes. He doesn't start paying taxes on gains until he runs out of accumulated losses to offset them. So the tax is effectively delayed until later in decumulation phase. Thus the reference to "interest free loan from the government". If I have any of this wrong, please correct me. Thanks.

Dave.

Oh, I didn't think of that additional tax-deferral benefit. Let's run some numbers using my example above.

assumer wrote:Let's say you have a $1mm cost basis (you bought some stocks for that price).

$1mm drops to $500k.In 10 years it goes back up to $1.3mm.

If you then sell (no TLH), you pay 15%20% on $300k ($1.3mm current price - $1mm basis)

If you TLH, you have a $500k capital loss.When you rebuy, and then 10 years later sell, you have a $800k gain ($1.3mm current price - $500k basis).

Instead, you sell half of the $1.3mm in 10 years (so you sell $650k), and the remaining $650k a year later (the 11th year), assuming no change in NAV after that one year.

Taxes Without TLH:Year 10: 20% * $300k <-- is this correct? If you only sell some shares, do you have to pay all the capital gains upfront?Year 11: 20% * 0 <-- you've already paid the capital gains

Taxes With TLH:Year 10: 20% * ($650k gain - $500k loss offset) = 20% * $150 <-- you are selling $650k of your rebased $800k gain Year 11: 20% * ($150k gain) <-- you already paid taxes on the $650k gain, so you need to pay taxes on the remaining $150k gain, and have no more carry-over loss to offset

So with TLH you've split your 20% * $300k tax bill over two years, essentially gaining a tax-deferral benefit.

The only question as I stated above, is if you only sell $650k of a $1.3mm investment of which $300k is a gain, are you required to pay that $300k the first time you withdrawl >= $300k?

gwrvmd wrote:I am always amused by peoples fascination with Tax Loss Harvesting, it is like The Red Badge of Courage, they're proud of it. In reality it is trying to get some benefit from an investing mistake. The market has been going up for the past 4 years, if I did any TLH in the past 4 years I wouldn't admit it, especially on this board....Gordon

VTI lost 17% between July 29th and August 19th 2011 - you wouldn't admit to having coincidentally bought in late July and TLHing in August? What makes that an investing mistake? The market hasn't been going up for the last 4 years straight you know...

I have been assuming that $3,000 you can take off your AGI per year is free. But is the cost basis lowered an additional $3,000 every year that you deduct it from your income? Again, I have been assuming "no" but could be incorrect.

I will be looking through the IRS website now for this unless someone already knows.

I have been assuming that $3,000 you can take off your AGI per year is free. But is the cost basis lowered an additional $3,000 every year that you deduct it from your income? Again, I have been assuming "no" but could be incorrect.

I will be looking through the IRS website now for this unless someone already knows.

The answer is no, but your picture is a little more off than just that. If you sell a position at a loss, that loss goes on your tax returns according to the appropriate rules until all the carryover is used up. This has no effect in and of itself on the cost basis of anything.

The next step is what you do with the proceeds of the sale. If, for example, you wait thirty days and buy the same position again, then your position will have the cost basis established with that purchase, presumably a lower one than the original holding had. This has nothing to do with how your taxes from the original sale come out. If you have used the money to buy some other investment, then that investment will have the cost basis established with that purchase, again probably lower than the original investment had.

The final step comes when and if you ever sell the new position. At that time you will have to calculate the capital gain or loss from the new cost basis and that cost basis is presumably lower that where you had started the whole thing and would expose you to a higher capital gain potential.

I have been assuming that $3,000 you can take off your AGI per year is free. But is the cost basis lowered an additional $3,000 every year that you deduct it from your income? Again, I have been assuming "no" but could be incorrect.

I will be looking through the IRS website now for this unless someone already knows.

The answer is no, but your picture is a little more off than just that. If you sell a position at a loss, that loss goes on your tax returns according to the appropriate rules until all the carryover is used up. This has no effect in and of itself on the cost basis of anything.

The next step is what you do with the proceeds of the sale. If, for example, you wait thirty days and buy the same position again, then your position will have the cost basis established with that purchase, presumably a lower one than the original holding had. This has nothing to do with how your taxes from the original sale come out. If you have used the money to buy some other investment, then that investment will have the cost basis established with that purchase, again probably lower than the original investment had.

The final step comes when and if you ever sell the new position. At that time you will have to calculate the capital gain or loss from the new cost basis and that cost basis is presumably lower that where you had started the whole thing and would expose you to a higher capital gain potential.

Thanks, DBR. Yes, I was simplifying, but I understand the reason the next time you sell your cost basis will likely be lower (but it isn't necessarily). The bold part was useful.

boggler wrote:Does anyone have a good sense of how much they've saved in "tax alpha" from doing this?

Here is a study of the benefits of TLH, which can average in the range of 0.6% per year. In the early years, you have higher savings rates - from the deduction of $3,000 per year in tax losses. In the later years, you have ongoing gains from investing the tax savings in the early years.

Let's look at an example to demonstrate. If you happened to put new money into the market just before a big downturn, your TLH results could be very fruitful. Let’s say you inherited $200,000 in 2000 or in 2007 and you put those funds into equities. After a year or two, you tax loss harvested $45,000 in losses. For the next 15 years you use $3,000 in capital losses against ordinary income, saving $1,000 per year in taxes. Each year you have enhanced you returns by 0.5% (even more if you use the lower current value of your inheritance equities). In addition to the 0.5% in direct tax savings, you have additional returns from the $1000 tax loan each year (compounding).

To demonstrate the additional returns, let’s ignore the compounding. After 15 years of tax losses, you have accumulated $15,000 of Uncle Sam’s money. If you invest that amount in equities, you could generate (at 6%) another $900 in pretax appreciation. Even if you assumed you paid tax on that $900 each year, your after-tax appreciation of $600 represents an ongoing and persistent 0.3% return from TLH.

My personal experience is similar to the example. New money in the early stages of a bull market will generate fewer TLH opportunities, but in our case my wife had an inheritance in 2000 and I had significant new money in 2006/2007 from bonuses and from exercising very ripe stock options. While I have not calculated my personal TLH rate of return, the figure of 0.6% seems reasonable to me.

Imperabo wrote:I'm guessing very few Bogleheads will be flat broke before they die. Many will have no problem holding the positions with the biggest tax burden until they can pass them onto their heirs with a stepped up cost basis.